Israeli Prime Minister Benjamin Netanyahu attends a Likud-Beytenu party meeting, at the Knesset, the Israeli parliament, in Jerusalem Thursday. Mr. Netanyahu clinched deals for a coalition government on Thursday reflecting a shift to the center in Israel and a domestic agenda that has shunted peacemaking with Palestinians to the sidelines.

Nir Elias/Reuters

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Tel Aviv — Israeli Prime Minister Benjamin Netanyahu has emerged from coalition negotiations politically bruised, but with a third administration in hand after being forced into concessions by an unlikely alliance between a dovish party new to the political scene and a party populated by settlement hawks.

The new Netanyahu government will be noteworthy for its prioritization of socioeconomic issues over foreign policy, reflecting two years of public frustration focused on the cost of living rather than the Palestinians. Even though the makeup of the coalition is now decided, it is still unclear what stance the government will take on the Arab-Israeli conflict.

Ending military draft exemptions for ultra-Orthodox Jews, as well as entitlements that keep them out of the workforce, will be at the top of an agenda after being pushed by the unlikely kingmaker alliance between Jewish Home, a pro-settler party of religious nationalists, and Yesh Atid, a secular centrist party that supports a Palestinian state.

"This is a government coalition united around the organizing principles of domestic economic reforms to assist the middle class and an endeavor to integrate the ultra-Orthodox into the workforce so it is no longer Israel's main welfare class," writes David Makovsky, a fellow at the Washington Institute for Near East Policy, in an e-mail. "On the Palestinian issue, it will be divided."

During six weeks of haggling that ended just hours before a legal deadline for forming a government, Jewish Home leader Naftali Bennett and Yesh Atid leader Yair Lapid teamed up to pressure Mr. Netanyahu’s Likud party to forgo a decades-old alliance with ultra-Orthodox parties he used to refer to as his "natural partners." For the first time in decades the ultra-Orthodox parities will sit in the opposition.

Mr. Lapid will get a chance to push his economic agenda as finance minister, and – to the chagrin of Netanyahu – his party will controlthe education ministry and try to end state funding for semiautonomous ultra-Orthodox schools that don’t teach core curricula.

Although Netanyahu was the unchallenged frontrunner throughout the campaign, most Israeli commentators remarked that he was forced to concede on many points of contention – an indication of his diminished stature after his party lost one-fourth of their seats in the Jan. 22 vote.

"Something quite serious happened in the last election: The change was a huge contradiction to all the election posters. Netanyahu knows it," says Ben Dror Yemini, the opinion editor at the newspaper Maariv. "He couldn’t have formed a government with just the ultra-Orthodox and right-wing parties. He understood it would leave him in a dead end.’’

The new Israeli agenda is the result of a shift catalyzed by the 2011 social justice protests that brought hundreds of thousands of Israelis into the streets over issues such as housing prices, but barely mentioned the peace process. In the recent election campaign, there was only a marginal debate over the moribund peace talks with the Palestinians.

On foreign policy, Netanyahu seems to be in a much more comfortable position: in the center with room to maneuver either way. To his left is Yesh Atid and former Foreign Minister Tzippi Livni, who has been put in charge of talks with the Palestinians after running a (failed) campaign emphasizing a peace agreement. To the right of him is the bulk of his Likud Party, which by and large opposes an immediate drive toward a two-state solution.

Moshe Yaalon, an ex-military chief of staff from Likud who will become defense minister, believes the Israeli-Palestinian conflict cannot be resolved in the near future. Avigdor Lieberman, leader of the ultra-nationalist Yisrael Beytenu party, is expected to return as foreign minister if a court case against him doesn’t end with egregious fraud charges.

Also on the right is the Jewish Home party, which opposes a Palestinian state and will be able to push settlement expansion through control of the housing ministry. Commentators in the left-wing Haaretz newspaper bemoaned the fact that despite the victory of the centrist Yesh Atid party, the pro-settler Jewish Home would get a veto on any new foreign-policy initiatives and pump funds into further entrenching the Israeli presence in the West Bank.

"You will see more positive movement on internal issues. The bad news is that the government will not be able to do anything substantial vis-à-vis the Palestinians. It will not be able to freeze settlements," says Ari Shavit, a political commentators for Haaretz. "Because of the Lapid-Bennett alliance, which is a surprise, the result is that Bennett and the settlers are the greatest winners.’’